Fear in the Insurance Jungle – the Condo Policy

Not many speak of the elephant in the insurance room, even though there are thousands of them: condominium policies. Often thought of as the Renters policies grown-up brother, the condo (and also the co-op) policy is the requirement renters encounter when they move from renter to owner.

So what’s the big deal? Renter policy, condo policy, my stuff is covered if I have a claim… or so the resident thinks. That half-million dollar view of the Gulf of Mexico is nice as a renter, but when ownership issues come into play, it gets more complicated.

And therein lies the rub- the renter becomes the owner. It’s a celebration when the deed and Homeowner’s Association (HOA) Bylaws are signed and sealed, but fantasy becomes reality when your neighbor’s water heater leaks and you have a mess, literally and figuratively.

Let’s step back and consider the differences between a Renter’s Policy and a Condominium Policy (this is not an exhaustive list):

An apartment is occupied under a lease agreement, renter uses, landlord owns. A condo space is owned, common areas are shared, the building structure is owned by others (might even be you).

A renter holds the insurable interest in personal property and improvements (maybe), a condo owner holds the insurable interest in personal property and the condo unit as defined in the bylaws, does not have direct insurable interest in the common areas and structure. This is an important distinction.

A renter’s policy affords coverage for personal property (often for certain perils only) and improvements (maybe), limited additional living expenses and liability (financial or physical injury to others). A condo policy affords coverage for personal property, and for real property for which the unit owner has ‘insurance responsibility’. This responsibility is (should be) defined within the Insurance portion of the HOA bylaws. A typical description might be “improvements made after the initial development, including painted walls surfaces, finished floors, upgrade fixtures or other improvements made.” Pretty much that which the owner sees but not the structure upon which improvements sit. One’s deed and condo bylaws should pretty well define what the unit owner, owns, and what should be insured. Figure EVERY set of bylaws is different from the next- this is one of the primary issues with condo claims- DISUNIFORMITY.

A claim for a renter’s policy focuses on personal property; the insured is not involved in structural or finishes damage. The landlord fixes the damage, the insured might be disrupted from the apartment but outside of personal property issues has little to concern him/her.

A condo claim- yikes. Damage is often suffered to the condo policyholder’s property and to the HOA property. The HOA policy has a deductible; the unit owner’s policy has a separate deductible. The damage may not exceed that of the HOA deductible so they don’t want to claim the damage. The unit owner’s insurer doesn’t afford coverage for the HOA property so who’s going to pay for repairs? Are the bylaws being understood the same way- what is original condition, anyway? There may be two adjusters, the HOA management and the unit owner involved. What if there’s secondary damage (mold), who pays for that? How about the water source unit owner’s liability coverage- won’t that cover the loss? There are four other units involved, one of which is unoccupied. How will all of this be coordinated? My mortgagee wants to hold the settlement until repairs are complete; repairs cannot be completed until the other units and HOA completes the other repairs. What do you mean the parquet floor is an upgrade from an original? It’s the same floor as when I moved in! Subrogation waiver? What’s that? The building failed to maintain the pipes, they are at fault. Why do I have to claim the damage at all?

Just a sample of the confusion that is present when a condo claim occurs.

The concerns for condo insurance confusion go beyond customers, beyond claims, beyond subrogation waivers. It’s simply a misunderstood and under-served policy, under-served insurance constituency. If the Beast thought the insurance stakeholders saw the whole of insurance as per the example of six blind men, surely condo insurance is perceived as a mystery that eludes even the touch of those fine gentlemen:

Insurable interest is seldom a concern or understanding for the parties

Condo association bylaws have little uniformity (some states do a better job with this than others)

Agents in the majority approach condos like renters (some of you out there are much better with this)

Condo owners seldom consider how coverage applies

Condo owners seldom consider how bylaws apply

Condo association board members are challenged in truly understanding and applying the insurance section of bylaws

Repairs to damaged units/buildings are a morass of who does, why I’s, not my problems, not what my association said, etc.

Gaps in insurance responsibility often leave the unit owner under-served

Disagreements between the unit owner’s carrier and the HOA carrier leave the unit owner stuck in the middle

Large losses blur responsibility and typically result in delays for repairs. Common elements must be repaired before units, which comes first, the chicken or the egg?

Among other concerns. And did I say that condo bylaws have little uniformity?

Condo policies are the jungle, with few knowledgeable guides around. The law of the jungle abides- the strong strident voice survives.

What are the solutions?

Regulators can work to a more uniform policy within and across jurisdictions. Agents can be better educated about the policies they offer, including how the policy and bylaws recognize insurable interest (of course that’s a pain because each policy differs, and each set of bylaws differs.) Customers can recognize a condo is a piece of real property and comes with responsibility for knowing how insurance works. HOA associations can keep bylaws current and reduce the amount of folklore interpretation. Adjusters can learn to fully investigate what claimed damage is, how it was caused, and what the bylaw’s insurance section states. Industry support groups can work toward more uniform condominium bylaws.

In the meantime, it’s a jungle for condominium owners, managers, and those who work with insurance for same.